Clients often ask questions about the use of beneficiary designations in their estate planning. Beneficiary designations can be a convenient way to avoid probate in some situations. If an individual is named as a direct beneficiary on an asset, that asset passes automatically to that individual, regardless of the terms of the decedent’s Will, Trust, or other estate planning documents.
Your attorney will often recommend that you coordinate your Payable-on-Death (POD) beneficiary designations or Transfer-on-Death (TOD) beneficiary designations to follow the distribution patterns in your overall estate plan for the purpose of avoiding probate. Despite the convenience, however, there are several good reasons to consider alternatives to direct beneficiary designations.
1. When you name direct beneficiaries using TOD and POD beneficiary designations to transfer all of your assets directly to those named beneficiaries, there is no one in charge of settling your estate. Furthermore, naming direct beneficiaries means there is no funding mechanism so that the person in charge can pay for funeral and burial, medical bills, debts, and administration expenses.
2. If you have relied on TOD and POD beneficiary designations to transfer all of your assets on death, there is no legal method for handling the disposition of tangible personal property, such as household furniture and furnishings, personal effects of sentimental value, motor vehicles, RVs, and watercraft.
3. While using TOD and POD beneficiary designations avoids the need to have an executor or personal representative appointed, this means that there is no one with the legal authority to file final income tax returns for the decedent. A trustee of a revocable trust has this authority, and so does the executor or personal representative named in a Will. The personal representative named in a Will has no legal authority unless there is a probate proceeding which admits the Will to probate.
In addition to the potential complications above, there are unique complications with respect to Transfer on Death (TOD) deeds for the purpose of transferring real estate without probate.
1. A TOD deed designating multiple children will effectively transfer title of the real estate directly to those children without probate proceedings. While the ease of transfer is convenient, none of the children have a greater say in the maintenance and disposition of the real estate. This can leave children in an untenable situation if they disagree about the disposition of the property, such as whether to sell the property or whether to make improvements to the property to prepare it for sale; not to mention the expenses in maintaining the property in the interim. The TOD transfer of title would even make it legal for one of the children to move into the residence and live there, while refusing to sell the residence.
2. A TOD beneficiary designation often does not cover contingencies. What happens if the named beneficiary predeceases the owner? We might expect that a parent will change their TOD beneficiary designations if a child predeceases them; however, what if the parent is mentally incapacitated, or simply does not take care of it? There is no simple procedure for determining who the successor beneficiaries are for purposes of providing clear title to the real estate. In the event a predeceased beneficiary’s minor children become the successor beneficiaries, real estate cannot be transferred to them without cumbersome court proceedings, such as a guardianship. Going forward, the court would be involved in all transactions involving the real estate, including sale. Furthermore, there is no ability to hold assets for the minor beneficiaries once they become the age of 18.
3. If a TOD beneficiary is in a nursing home and receiving Medical Assistance (Medicaid) benefits, the automatic transfer of real estate to them will affect their Medicaid eligibility and, in all likelihood, cause a loss of benefits. Their proceeds from the sale of the property will likely have to be used to pay nursing home expenses.
Consideration of whether or not to use direct beneficiary designations is crucial to your estate plan. While it may work well in some situations, it is important to consider both the advantages and disadvantages and work closely with your estate planning attorney to avoid common pitfalls. When in doubt, seek proper legal advice before completing direct beneficiary forms to make sure your designations are consistent with your overall estate planning goals.
Family Planning for Long-Term Care
When an ill or older relative needs help with daily activities and personal care, selecting an at-home caregiver can be a worrisome task. Who will provide care? How will they be compensated? What if the older relative needs not just occasional, but full-time care? To alleviate these concerns, a growing number of adult children are becoming caregivers for aging parents.
Although many adult children or grandchildren feel a strong sense of duty to provide care for their loved one, being a caregiver can be extremely time consuming. Providing care to an aging parent may make it difficult for the caregiver to meet other commitments, and may even result in sacrificing employment in order to provide the necessary care.
While many individuals are willing to voluntarily care for a loved one without any promise of compensation, a growing number of families are entering into Caregiver Contracts. A Caregiver Contract is a formal agreement among family members to compensate a person providing care.
A Caregiver Contract has several advantages. In addition to providing financial resources to the family member doing the work, particularly where the caregiver has given up other employment, it assures other family members that caregiving is fairly compensated and describes the care and personal services that are expected in return for a specific amount of compensation. This can alleviate family concerns over who will provide care and how much money will change hands, as well as avoid potential misunderstandings over the loved one’s reduction in assets (and the amount of money that would otherwise be inherited upon death).
Such contracts are also a key part of Medicaid planning, helping to spend down savings so that the recipient of care might more easily be able to qualify for Medicaid benefits. More importantly, without a Caregiver Contract, payments made to a family member for providing care will be considered a “divestment” for Medicaid eligibility, resulting in an ineligibility period. While payments to unrelated third parties for caregiving and personal services are not divestments, caregiving provided by a relative is considered gratuitous absent a contract that meets certain requirements.
Under the Medicaid rules, all payments to relatives for care and services made within five years of an application for Medicaid will be considered a divestment, unless all of the following are true:
• The services directly benefited the individual applying for benefits.
• The payment did not exceed reasonable compensation (prevailing local market rate) for the services provided.
• If the total payment made to the family member is greater than ten percent (10%) of Medicaid’s Community Spouse Resource Allowance, the institutionalized person must have a written, notarized agreement with the relative. (This threshold will range from $5,000 – $11,922).
• The agreement must specify the services and the amount to be paid and exist prior to the time any services are provided.
In addition to the requirements under the Medicaid rules, a properly drafted Caregiver Contract should contain provisions regarding the type of care, location of the care, terms and frequency of compensation, length of the agreement, income tax reporting issues and provisions for modification or termination. Contracts, even with family members, are legal documents. It is important to get your attorney’s help in drafting the contract to avoid omitting important terms, to provide proper documentation, and to seek advice about qualifying for Medicaid in the future.
The Achieving a Better Life Experience (ABLE) Act, enacted by Congress in late 2014, amended Section 529 of the Internal Revenue Code, permitting states to allow tax-advantaged savings accounts to be established for qualified individuals with disabilities for certain disability-related expenses. Funds held in ABLE Accounts will generally not be considered in determining eligibility for the supplementary security (SSI) program, Medicaid, and certain other federal means-tested benefits.
Unlike a regular savings account, an ABLE Account allows individuals with a disability to save and invest money without losing certain public benefits. Income from an ABLE Account is tax free when used for qualifying expenses, as defined below. (Nonqualified withdrawals will tax gains as ordinary income plus a 10% penalty.) Contributions to the account made by any person (the account beneficiary, family and friends) are not tax deductible.
The U.S. Treasury Department issued preliminary rules in 2015. Wisconsin was one of many states passing ABLE Account legislation, doing so in the 2015-2017 state budget. On February 16, 2016, Wisconsin repealed the legislation, but subsequently extended preferential tax treatment when residents create an ABLE Account out of state with another state’s program.
Who is Eligible to Establish an ABLE Account?
Eligibility is limited to individuals with significant disabilities with an age of onset of disability before turning 26 years of age. To meet the disability requirement, an individual must be entitled to Supplementary Security Income (SSI), be entitled to Social Security Disability Income (SSDI), or meet the SSI criteria regarding significant functional limitations. In addition, designated beneficiaries can certify, under penalty of perjury, that they meet the qualification standards, including their receipt of a signed physician’s diagnosis, if necessary, and that they will retain that diagnosis and provide it to the program or the IRS upon request.
ABLE Accounts Allow Individuals with Disabilities to Remain Eligible for Public Benefits.
Many individuals with disabilities and their families depend on public benefits, like SSI, FoodShare, Community Care and Medicaid for income, health care and food and housing assistance. Eligibility for these public benefits is for individuals who have less than $2,000 in cash savings, retirement funds and other assets. The ABLE Act recognizes the potential extra and significant costs of living with a disability, or raising a child with a disability for assistance, services and health care not covered by insurance, Medicaid or Medicare.
Limitations on ABLE Accounts.
Contributions by all participating individuals, including family and friends, are limited to a total of $14,000 per year. The amount will be adjusted annually for inflation. The total account maximum limit is the same as 529 college savings, currently $440,300 as of 2016 in Wisconsin. Only one ABLE account is allowed per eligible individual. In addition, if an individual with a disability is a recipient of SSI, the individual would no longer be eligible for SSI if the account exceeds $100,000. Eligibility for Medicaid would not be affected; however, estate recovery from ABLE accounts is allowed for Medicaid recipients upon the death of the beneficiary.
Qualified Disability Expenses.
A “qualified disability expense” is defined as any expense related to the beneficiary as a result of living a life with disabilities. These include education, housing, transportation, employment training and employment support, assistive technology, personal support services, health care expenses, financial management and administrative services. Distributions for certain expenses, (such as housing) may affect SSI benefits.
Opening an ABLE Account.
The U.S. Department of Treasury regulations guide the states in terms of (a) the information required to be presented to open an ABLE account; (b) the documentation needed to meet the requirements of ABLE account eligibility for a person with a disability; and (c) the definition details of “qualified disability expenses” and the documentation that will be needed for tax reporting.
Differences Between Special Needs or Pooled Trust.
While Special Needs Trusts and Pooled Trusts also allow an individual with a disability to maintain eligibility for public benefits, an ABLE Account offers a significant and viable option, in addition to, rather than instead of, a Trust. The cost of establishing an account will be less than establishing a Trust and still offers account owners control over the distribution of funds. An ABLE Account, used in conjunction with a Special Needs Trust or Pooled Income Trust, offers multiple options for an individual to maintain benefits while providing for the significant expenses of a disability to the maximum extent possible.